Friday, 15 April 2016

The future of telco regulation

No doubt you've seen all the coverage of the government's high level decisions on regulation of the telco sector from 2020 onwards (if not, the media release is here, the once-over-lightly summary is here and if you want to mainline the hard stuff go here).

It's a good set of decisions, though a lot of detail is yet to come, and there'll be another round of consultation on options. The big (and expected) decision is that both fibre and copper based internet services will be regulated as utilities, in much the same way as electricity lines businesses are today. That changes the way copper based internet is priced today, and properly so - as I argued here, the 'TSLRIC' model for pricing copper was good for one purpose (enabling efficient competitors to get into the game) but not adequate for regulating a copper provider's above-normal profits.

The media reaction is all over the new 'utility' model. But there's one part of the decisions that hasn't been picked up much, and here it is:

However, there is also the option for a more light-handed ‘backstop’ regime. The threat of regulation combined with requirements to release financial and cost information could work as an effective incentive to keep prices at reasonable levels. While this isn't the Government’s preferred approach at this time, we will be interested in discussion on this point.

I think this is an option that should be explored further. I'm not sure that an information disclosure plus hidden knuckleduster regime would cut it on its own - it might, and maybe existing practice could be strengthened, but the precedents to date aren't great - but there very badly needs to be some intermediate, simpler, faster, less complex and less expensive alternative to the 'building block' model of utility regulation that's being proposed.

The regulatory regime would be much better if, for example, there was an 'RPI minus X' option somewhere along the way - where suppliers are allowed to raise their prices by the Retail Price Index (this is UK terminology originally, so that would be our Consumer Price Index), less some amount 'X', a plausible enough guess at what sort of productivity and efficiency gains the supplier can wring out of the business.

There's nothing inherently wrong with the 'building block' approach. Arguably, it gets closer to a supplier's 'true' costs and profits than anything else. Applied fairly and consistently, it can form a good basis for an effective regulatory compact between regulator and regulatee, and can protect consumers from profiteering. But as anyone who's had anything to do with the process knows, it's a beast of a thing to construct and maintain (or even understand, in its thornier thickets). If we end up there, we end up there, but we should really put some serious effort into intermediate or alternative options - particularly as, at some point, we as a four and a half million people economy ought to start using more "cheap and cheerful" policy regimes, rather than the industrial strength superstructures a US or a UK can afford.

A final comment: the government is keen on keeping competition up to the mark in the mobile market, and is thinking about things like mandating the price competitors pay to access incumbents' mobile towers. And it said

We will consult further on encouraging sharing of infrastructure, and making sure the Commerce Commission has the tools it needs to investigate the market.

I'm hoping the last bit of that sentence means that the government is finally getting its head around the desirability of the Commerce Commission being able to have a proactive look at the state of competition in any given market - a "market studies" power, in the jargon. I've been banging away at this for ages - my latest efforts are here and here - as have others (notably our Productivity Commission). Hopefully this latest telco exercise has finally nailed the absurdity of the country's competition watchdog not having the legal authority to do a key element of its job.

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